Economics and Statistics Administration

Abstract

Research and development (R&D) depreciation rates are critical to calculating the rates of return to R&D investments and capital service costs, both of which are important for capitalizing R&D investments in the national income and product accounts. Although important, measuring R&D depreciation rates is extremely difficult because both the price and output of R&D capital are generally unobservable. To resolve these difficulties, economists have adopted various approaches to estimate industry-specific R&D depreciation rates, but the differences in their results cannot easily be reconciled. In addition, many of their calculations rely on unverifiable assumptions. Unlike tangible capital which depreciates due to physical decay or wear and tear, business R&D capital depreciates because its contribution to a firm’s profit declines over time. Based on this understanding, I developed a forward-looking profit model with a gestation lag to derive both constant and time-varying industry-specific R&D depreciation rates for ten R&D intensive industries that are identified in BEA’s R&D Satellite Account. I used two data sources, a Compustat SIC-based database and a BEA-NSF NAICS-based database, to perform model calculations. The data cover the period from 1989 to 2008. The results align with the major conclusions from recent studies that R&D depreciation rates are higher than the traditionally assumed 15 percent and vary across industries. Moreover, the industry-specific time-varying R&D depreciation rates provide information about the dynamics of technological evolution and competition across industries. Acknowledgments. I would like to thank Ernie Berndt, Wesley Cohen, Erwin Diewert, Bronwyn Hall, Brian Sliker, and many seminar participants in 2010 NBER Summer Institute CRIW Workshop and 2011 ASSA Conference for helpful comments. I am grateful to Brian Moyer and Carol Moylan for their support to this project, and to Jennifer Lee and Jeff Young for excellent assistance with data compilation. The views expressed herein are those of the author and do not necessarily reflect the views of Bureau of Economic Analysis.

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